The Great Debate: Markdown or Carryover?
Introduction
No single question has been posed to me more often. Retailers of all types always seem to question whether they would be financially better off to markdown and clear out remaining past season inventory or carry it over for the same season next year. In the shoe industry this topic arises twice a year: in late summer at the end of sandal season and in late winter/early spring when boot sales are winding down.
Outlining the Argument
The Argument for Carryover
The argument for carryover generally involves a merchant not wanting to heavily discount products that he or she feels will have to be repurchased next year. These products will be in most cases the same styles and colors as the previous year. Prices may be higher which provides the retailer a chance to even mark up the existing stock to reflect current retail prices therefore generating perhaps even more gross margin dollars than the previous year.
The Case for Clearing Out Seasonal Merchandise
The case for clearing out seasonal merchandise is structured around generating cash flow from goods that did not sell during the period for which they were intended. Open-to-buy for the category is not compromised by trying to “buy around” past season’s carryover. Colors sometimes do change styles often are updated boxes do get worn and merchandise tags can become frayed and discolored. Not to mention ancillary expenses such as taxes and insurance that will be incurred on old inventory.
Considerations
Why is There Extra Inventory?
Perhaps the first question you must ask yourself is why is there extra inventory in the first place? In the case of the winter of 2011/2012 warm weather precluded several retailers from selling as many boots gloves hats and other cold-weather items as they may have sold during a “normal” winter. Was this the entire story or a symptom of a bigger problem such as a poorly designed merchandise plan or worse yet no plan?
Evaluate Your Current Cash Needs
Another consideration would be to evaluate your current cash needs. Ask yourself this question “Do I want the cash from this inventory now or can I afford to sit on it in my backroom for six months and hope I sell it the next season?” A good follow-up question at this point might be if you didn’t sell the particular item last season why do you think demand will be any stronger next year? Will your customers notice or care that you are dragging out last year’s merchandise?
Look at the Numbers
Example A:
Sales of winter boots for the year are my keyword00000 with a gross margin of 48% or $48000. The boot classification turns 2.5 times. my keyword00000/2.5 turns = $40000 average inventory @ retail. $40000 x 52% (cost complement of the GM) = $20800 average inventory @ cost. GMROI = $48000/$20800 = $2.3 GMROI
Example B:
Sales of winter boots for the year are my keyword00000. Gross margin = 42% or $42000. Turns are 4. my keyword00000/4 = $25000 average retail inventory. $25000 x 58% = my keyword4500 average inventory @ cost. GMROI = $2.9
In the illustration above sales are the same for both examples.
Example A
Markdowns are nominal and inventory turnover for a seasonal class is slow. Space doesn’t allow for a 12-month merchandise plan of this class to be viewed or you would see that more merchandise was carried over in the off months than would be optimal. Inventory actually sat on the shelves for nearly five months with no sales activity.
Example B
Markdowns were taken throughout the season on slow-moving styles and end of season markdowns were more significant. The result was $6000 less in gross margin dollars. The faster turn came from the fact that inventory levels started building in Aug. peaked in Oct. and stock was virtually gone by March. The end result is an increase in GMROI of 26%.
General Rule
As a general rule it makes more sense to clean up seasonal offerings and buy fresh the next year. That said your world won’t come crashing down and you won’t be viewed by your peers as a terrible retailer if you decide there are a few styles hither and yon that for whatever reason you feel you can’t part with.
What must be avoided at all costs are backrooms crammed with seasonal carryover year after year tying up needed cash and choking off the ability to land fresh new products which we all know is the driving force behind increased sales.
Ritchie Sayner
Summary of The Great Debate: Markdown or Carryover?
The article explores whether retailers should markdown unsold inventory or carry it over to the next season. While carrying over can potentially lead to higher margins if styles remain unchanged clearing out can improve cash flow and prevent outdated stock from cluttering storage. The general advice is to clear seasonal inventory to make room for new products which are crucial for boosting sales.
“What must be avoided at all costs are backrooms crammed with seasonal carryover year after year tying up needed cash and choking off the ability to land fresh new products.”
Real-World Examples of Markdown vs. Carryover
The debate between markdown and carryover strategies can be seen across various industries. Here are a few real-world examples illustrating how businesses handle their inventory decisions:
- A clothing retailer faces the decision of marking down last season’s winter coats. They choose to clear out the inventory through a sale to free up space and cash for new spring arrivals aligning with the strategy of Example B where markdowns increase inventory turnover.
- An electronics store holds onto unsold models of smartphones expecting the demand to remain steady next year. They anticipate that the cost of new inventory will rise thus opting for carryover to potentially increase margins similar to the strategy outlined in the Argument for Carryover.
- A furniture company decides to markdown last year’s outdoor patio sets at the end of summer. This decision is based on the need for immediate cash flow and to avoid storage costs reflecting the rationale for clearing out seasonal merchandise.
